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Liquidity when it matters: QE and Tobin's q

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  • John Driffill
  • Marcus Miller

Abstract

The model of credit-constrained investors developed by Kiyotaki and Moore is used to analyse 'unconventional monetary policy' actions taken in the US and UK. We make two contributions. The first is expositional--to show that their model of a liquidity crisis can be represented as a two-equation dynamic system in K (the aggregate capital stock) and q (Tobin's q, the price of capital goods) with saddle-point dynamics. This allows for an intuitive, graphical exposition of the issues and results. The second is to show how a liquidity crisis leads to a deep recession when the assumption of perfect wage and price flexibility is replaced by downwardly rigid wages and prices. As in Del Negro et al., we show how central bank policies to increase liquidity can ameliorate the recession: but we use our simplified model for the purpose. Further, we analyse how fiscal intervention can help combat recession. Copyright 2013 Oxford University Press 2013 All rights reserved, Oxford University Press.

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Article provided by Oxford University Press in its journal Oxford Economic Papers.

Volume (Year): 65 (2013)
Issue (Month): suppl_1 (April)
Pages: i115-i145

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Handle: RePEc:oup:oxecpp:v:65:y:2013:i:suppl_1:p:i115-i145

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  1. V.V. Chari & Patrick J. Kehoe & Ellen McGrattan, 2004. "Business Cycle Accounting," NBER Working Papers 10351, National Bureau of Economic Research, Inc.
  2. Kevin C. Murdock & Thomas F. Hellmann & Joseph E. Stiglitz, 2000. "Liberalization, Moral Hazard in Banking, and Prudential Regulation: Are Capital Requirements Enough?," American Economic Review, American Economic Association, vol. 90(1), pages 147-165, March.
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